This article first appeared in The Edge Malaysia Weekly on May 15, 2017 - May 21, 2017

PROTON’s sales have not been good, and according to sources, the national carmaker has been extended a line of credit by the government to the tune of RM1.7 billion as a stopgap measure.

“The cash from the [conditional] soft loan (of RM1.25 billion provided last year) has been fully used up to pay vendors. But Proton’s sales have not improved, although it has been marketing its new cars very hard, throwing promotions left and right. It needs more help from the government,” explains an executive with knowledge of the matter.

It is understood that Proton will not draw down the whole sum at once. Instead, the money is supposed to tide it over until parent company DRB-Hicom Bhd secures a foreign strategic partner. Currently, it is a two-horse race between China’s Geely Automobile Holdings Ltd and France’s Groupe PSA.

It is not clear how the government will be able to recoup the additional funding it is giving Proton.

That said, all eyes are on Prime Minister Datuk Seri Najib Razak’s trip to China from May 12 to 16. His itinerary includes meetings with Alibaba Group founder and executive chairman Jack Ma as well as Chinese President Xi Jinping.

It is not clear if Najib will also take the opportunity to advance talks with Geely.

According to sources, Malaysian business tycoon Tan Sri Syed Mokhtar Albukhary will also be visiting China during the period.

Against this backdrop, DRB-Hicom’s share price shot up to a 1½-year high of RM1.68 last Friday, representing gains of 17.5% week on week and 84.23% year on year.

But while the possibility of a Proton-redeeming deal may hog the limelight, the carmaker’s abysmal sales figures should not be overlooked.

As at April this year, Proton had managed to sell about 25,000 units. While this is 5.4% more than sales in the same period last year, it is important to note that Proton introduced three models to the market — the new Saga, Persona and Perdana.

For context, 2016 was a bad year for carmakers. From that low base, the broader automotive market has rebounded 5.4% — from 173,428 units to around 183,000. In fact, month on month, Proton’s sales have been falling this year despite its aggressive campaigns. It sold 7,207 units in January, 6,099 in February and 6,070 in March.

In April, sales fell 7.5% — the sixth consecutive monthly contraction — to around 5,600 units. But what is astounding is that Proton’s market share — at only 13.4% — fell to fourth place for the first time, behind Perodua, Honda and Toyota.

To be fair, April is traditionally a weak season for Proton.

For the four months ended April, Proton barely hung on to third place with a market share of 13.7%. Perodua commanded 35.4% while Honda came in second with 18.9%. Toyota was marginally behind Proton with a market share of 12.2%.

The trouble with Proton is that it commits higher average volumes to its vendors. Regardless of realised sales, it has to compensate them a predetermined amount based on previously agreed-upon sales targets.

This arrangement ensures that the vendors are incentivised to invest in machinery needed for new models, without having to worry about the risk of poor sales.

Thus, the funding from the government will indirectly ensure that Proton’s vendors get paid promptly this year. Recall that the carmaker had ended up owing huge sums of money to its vendors, money that could only be repaid via a soft loan from the government.

But vendors are not Proton’s only creditors. In its FY2016 ended March 31, Proton had RM340 million cash in contrast to a RM260 million repayment due on its RM840 million Islamic medium-term notes.

Another repayment of around RM260 million is also due this year. Based on past accounts, Proton’s cash flow would be highly stressed to support its current operating costs as well as its debt obligations without additional funding.

At the rate things are going, government funding alone will not sustain Proton in the long run, and with federal coffers already stretched thin, pressure will be mounting on DRB-Hicom to strike a deal with either Geely or PSA soon.

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